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Bullwhip Effect in Supply Chain

Abstract. Demand variability increases when it moves downstream to upstream in a supply chain, this is called the 'Bullwhip effect'. This effect causes unnecessary inventory pile up along the nodes of the supply chain and hence reductions of this play a significant role. In this paper the causes of bullwhip effect are analyzed and the reducing measure is discussed, such as: Establishing the information sharing mechanism, Coordinating the information sharing's benefit allocation model, establishing the strategic alliance, strengthening the trust cooperation, Strengthens the stock management and reduces the supply chain lead time.

Key words: bullwhip effect, inventory, supply chain, lead time.

Introduction

The variability in demand gets amplified as it reaches the final link of the supply chain, which results in increased cost and reduced profit margin. The flow of the information in the supply chain is the most important factor in determining the effectiveness of the supply chain. Apart from reduction in batch sizes and recurrent ordering policy, the technology of making the demand and other information visible to all participants of the supply chain will reduce the Bullwhip Effect to a great extent. This can be achieved by well-organized information interchange between the supply chain participants. It can be summarized that Bullwhip Effect causes information distortion, delays in procurement, and delays in availability of the goods to the customer. This happens largely due to the decisions at every stage of the supply chain. It is apparent that it is not possible to entirely reduce the Bullwhip Effect, but certain care can be taken in order to ensure that it is reduced so that the end consumer is least affected. In order to help in reducing the Bullwhip Effect, information technology can be used as a powerful tool. Internet based information interchange plays a role in effective management of a supply chain, by enhancing the quality and speed of the information exchanged.

As the description by Lee et al. (1997), the bullwhip effect happens in many companies. The most famous case which happened in Procter & Gamble (P&G) and Hewlett-Packard (HP) offer good understandings of the bullwhip effect. This information distortion was first pointed out by Forrester (1958) in his system dynamics, and he also pointed that the way to deal with is reducing delays in the supply chain (Hussain and Drake, 2011). The most famous ”Beer Distribution Game” was reported by Sterman (1989) as an proof of the bullwhip effect, in this game, players are segregate into four parts and each part represent brewer, distributor, wholesaler and retailer. The four players can only make inventory decisions by the orders from nearest player, they cannot exchange information with other player . The outcome of the game show that demand information distortion in supply chain internal transfer due to the asymmetry of information between each node enterprises in the chain in order to maximize their own interests. The bullwhip effect could easy cause a set of risks gradually, from downstream to upstream; it will influence the operation of the total supply chain, increase the inventory and waste of resources. Therefore, study the bullwhip effect and remove its harmful impacts on the supply chain has an significant significance. There have various insights on how to mitigating the bullwhip effect according to various researchers. Forrester (1961) hold the view of that the bullwhip effect can be mitigated through alteration in behavioural practice, Sterman (1989) have the insight of modification in individual education can help to mitigate the bullwhip effect. While according to Lee et al. (1997), there are four major reason of bullwhip effect: 1. Demand forecast updating, 2. Order batching, 3. Price fluctuation, and 4. Rationing and shortage game. Lee et al. (1997) also suggest attacking the institutional and inter-organization infrastructure and related processes can make for organizations to control the bullwhip effect.

Objectives of the Study

The aim of this paper is to give an extensive literature overview of the bullwhip Effect, and explain its causes and proposed remedies.

Research Methodology

This paper is purely conceptual in nature which is based on the review of relevant literature. For the purpose of reviewing the literature, we selected the relevant titles thereafter; we conducted an extensive literature review to reach at meaningful conclusion.

Causes of Bullwhip effect

Forecast each entity in the supply chain gives their own forecast about the demand and this multiple demands lead to distortions. Each members demand is based on orders received at his end and not based on the demand given by the end customer.

Order Batching to get the economies of scale in production and transportation every member of the chain practice order batching. Sometimes order bunching takes place due to the planning practices of the firm. For example if firm work on MRP software once a fortnight, of course all the orders for the fortnight will get bunched.

Price Fluctuations price promotions or discount causes forward buying and creates much distortion. Frequent changes in the price affect the pattern of buyer’s ordering and this creates distortions.

Shortage In the case of shortages the suppliers usually resorts to rationing which in turn provides incentives to buyers to inflate orders.

Long Lead Time Due to long lead times the planning horizon of other partners increase further every partner is forced to keep safety stock resulting in an overall distortion increase in the chain.

Impact of Bullwhip Effect

Bullwhip effect in supply chains has led to the distortion of demand information, the destruction is done both at the micro and macro level (Deng and Ma, 2009)

At the micro level, the bullwhip effect in supply chain will bring a double loss for companies consist of efficiency and profitability. Firstly, the product stock is to adapt the demand change to setup, the excessive demand fluctuation caused to supply in chain's excessive stock directly, has taken enterprise's fund massively, formed the high quota the inventory cost, brought the force for enterprise's production and operating activities. Secondly, because the demand uncertainty enlarged, the difficulty of the enterprise’ perfect forecast to the demand is also enlarged. And in the supply the possibility which the back ordering and out of stock is increasing, all of these lead to reduce the level of customer service. Third, the demand distortion also affects enterprise's production. Because of the distortion demand information misleading, the productive plans have to revise frequently, produces cannot advance continually. Therefore the production cost and the physical distribution cost is rising also From a macro level, the bullwhip effect will cause the economic resource the blind flowing and the low efficiency disposition .Bullwhip effect is a classic "market failure" phenomenon, because the upstream industry received the demand information deviated from the true demand, it may lead to over-investment or investment shortage. The capital enters greatly means the competition aggravating and the income drop, ultimately hurting the development of the industry itself. Therefore causing the financial system's hidden danger and bring the risk of the macroeconomic movement.

Possible remedies for the Bullwhip Effect

Reducing Uncertainty – Reducing uncertainty is the vital step towards reducing the Bullwhip Effect. Centralizing the demand information can decrease uncertainty to a great level. This will make the customer demand and forecasted retailer’s demand seen to all partners of the supply chain. This decreases forecasting error. But, various buying policies and forecasting methods adopted by various supply chain partners induces the Bullwhip Effect in to the system. It is also right that even if all the supply chain partners use the same forecasting technique and buying policy the Bullwhip Effect cannot be eliminated entirely. Data needs to be made available to all the links in the chain. This simple change in demand data transfer allows parallel forecasting and avoids the magnification that results from a multi-stage forecasting process. It also has the added benefit of eliminating the delays inherent in a multi-stage system.

Reducing Variability- Reducing the inconsistency in the demand can decrease the Bullwhip Effect considerably. Regular variation in product prices results in a pseudo increase or decrease in demand thereby introducing the variation into the system. If a product is offered for a constant price as in EDLP (everyday low pricing), the Bullwhip Effect can be decrease to a substantial level.

Lead Time Reduction – Lead-time can be separated into order lead-time and information lead-time. Reducing both types of lead times will decrease a significant amount of variation in the system. In forecasting, safety stock levels and reorder points are a function of lead-time; reduction in lead-time reduces the variation. Systems such as cross docking and EDI (Electronic Date Interchange) can lessen both the ordering lead-time and the information lead time

Strategic Partnering and Buying – Strategic partnering decreases the lead-time to a great extent. Information sharing in strategic partnering reduces variation in the system. This can be achieved by the use of a concept called VMI (Vendor Managed Inventory). This requires the manufacturer to sustain the inventory at the point of use thus reducing the variation in the system. The strategic buying policies adopted by the buyer and the manufacturer reduce the variation caused due to quantity discounts offered by the manufacturer.

Advanced Information Technology – Advances in information technology has made the concept of information at your fingertips possible. E-Commerce eliminates the intermediaries such as the retailer from the system and gives the point-of-sale demand to all the supply chain partners. Elimination of the intermediaries, called disintermediation decreases the variation in the system to a large level. This makes the demand information dynamically available to all the participants of the supply chain. This enhances the effective integration of supply chain partners having conflicting objectives and opinions. The intranet, a company internal internet, replaces the sequential information flow within the system with dynamic information flow, thereby reduces the manufacturing lead-time and in-turn the Bullwhip Effect. This also imparts flexibility to the system and increases the response speed. A good information interchange system, like the internet, coupled with a good warehouse management and transportation management system can significantly reduce the Bullwhip Effect.

Conclusion:

The variability in demand gets augmented as it reaches the final stage of the supply chain, which results in increased cost and reduced profit margin. The flow of the information in the supply chain is the most important factor in determining the effectiveness of the supply chain. Apart from reduction in batch sizes and frequent ordering policy, the technology of making the demand and other information able to be seen to all participants of the supply chain will reduce the Bullwhip Effect to a large extent. This can be achieved by efficient information exchange between the supply chain participants.

It can be summarized that Bullwhip Effect causes information distortion, delays in procurement, and delays in availability of the goods to the consumer. This happens mainly due to the decisions at each stage of the supply chain. This paper has discussed the major factors that lead to the Bullwhip Effect and also listed the possible remedies. It is obvious that it is not possible to completely eliminate the Bullwhip Effect, but certain care can be taken in order to ensure that it is reduced so that the end consumer is least affected. In order to help in reducing the Bullwhip Effect, information technology can be used as a powerful tool. Internet based information interchange plays a role in effective management of a supply chain, by enhancing the quality and speed of the information exchanged.

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